Across the capital, mushrooming construction sites,glass-clad office towers and giant billboards showcasing hi-techelectronics point to Ethiopia's emerging middle class. But idleyouths loitering on streets and impoverished slums underscoresome of the challenges facing the government.

Economic growth will slow to an estimated 6.5 percent thisfiscal year from 8.5 percent in 2011/12, Jan Mikkelsen, theIMF's country representative in Ethiopia, said in an interviewon Thursday.

"The amount of financing that those projects absorb is solarge that it is crowding out activity in the private sector,"said Mikkelsen, whose office overlooks a new superhighwayrunning through central Addis Ababa.

Businesses struggle to access private credit and foreignexchange, curbing private sector activity and creating animbalance between the private and public sectors.

"That imbalance is hurting growth over time and makes itmore difficult to attract investors," he said, projecting growthwould remain steady at 6.5 percent in 2013/14 as well.

"Our projection given the policy stance ... is thatsingle-digit inflation will be maintained this year and nextyear," said Mikkelsen, adding this probably meant upper singledigits.

The battle against inflation has been fought at the expenseof the country's foreign exchange reserves, the main tool usedby Ethiopia to mop up liquidity and which fell by some $1billion between 2010/11 and 2011/12, according to the IMF.

At the start of this fiscal year running to July 7, reservesstood at about $2.3 billion, less than two months' import cover.

The government was on track to end the year with reservessteady, Mikkelsen said, but there are questions over how easilythe government can sustain its spending programme whiletargeting single-digit inflation.

The Fund backs Ethiopia's efforts to build more roads andhydroelectric dams, but Mikkelsen said Addis Ababa could slowthe pace of public sector investment to give private firms abigger role, which would ease demand for domestic financing andattract foreign investors.

The state-owned Commercial Bank of Ethiopia controlled morethan two thirds of the entire sector's assets in 2012, accordingto the IMF, while the only telecoms firm is state-run.